Why is the Wesfarmers share price having such a rough trot in April?

The ASX 200 has outperformed Wesfarmers shares this month. What’s happening?

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Key points

  • The Wesfarmers share price has underperformed the ASX 200 in April
  • Consumer sentiment continues to drop, according to Westpac
  • Wesfarmers plans to be price-competitive for consumers

The Wesfarmers Ltd (ASX: WES) share price has gone down more than 2% in April. That compares to a 1.4% gain for the S&P/ASX 200 Index (ASX: XJO).

However, before considering why this might have happened, it may be worth noting that this underperformance is only looking at one month of returns.

Over the past five years, Wesfarmers shares have risen by around 60%, while the ASX 200 has risen by just under 30%.

So, what’s going on with this underperformance in April?

What could be impacting the Wesfarmers share price?

It is being widely reported that local and global inflation is elevated. This has led to expectations that the Reserve Bank of Australia (RBA) is going to start increasing interest rates in June 2022.

As reported by Reuters and other media outlets, the Westpac-Melbourne Institute index of consumer sentiment showed a decline for a fifth straight month because of rising inflation and the potential for higher interest rates, hurting spending intentions.

Reuters reported that the “survey suggested the government’s budget in March had a limited impact on the national mood, even though it contained pre-election tax breaks and cuts to fuel excise”.

Westpac chief economist Bill Evans was quoted as saying: “There is further evidence that interest rates, inflation and weather continued to unnerve consumers in the current survey.”

The worst decline in sentiment occurred with households that had a home loan.

However, Westpac also pointed out that mortgage borrowers have been accumulating a savings buffer during COVID-19 in mortgage offset accounts, with balances rising to 2.5% of disposable income over FY21 compared to around 1% in earlier years. Due to that, the median excess payment buffer is 21 months, according to Westpac, up from 10 months before the pandemic.

However, Westpac has also noted that, by looking at RBA data, it is unsure how much of the buffer is available to the most vulnerable borrower groups. A fifth of variable-rate borrowers would face a 40% lift in average repayments if the RBA rate were to increase by 200 basis points, according to Westpac.

How is the company planning to handle inflation for consumers?

When Wesfarmers released its FY22 half-year result, it said that overall economic conditions in Australia remain favourable, supported by strong employment and high levels of accumulated household savings.

It said it is actively managing increasing inflationary pressure and will leverage its scale to mitigate the impact of rising costs.

Wesfarmers said its retail businesses will increase their focus on price leadership and are “well-positioned to provide customers with great value on everyday products as rising cost-of-living pressures impact household budgets”.

COVID-19 continues to impact the business. It said that it’s experiencing stock availability impacts. Supply chain disruptions, elevated transport costs, and constraints in the domestic labour market are expected to continue in the second half.

Is the Wesfarmers share price an opportunity?

Many brokers are unconvinced.

The broker Citi is ‘neutral’ on Wesfarmers, with a price target of just $50. That implies the Wesfarmers share price — which is currently $49.35 — may be almost flat over the next year.

Credit Suisse is also ‘neutral’, but the price target is $55.19. That suggests a possible rise of more than 10%.

On Citi’s numbers, the Wesfarmers share price is valued at 24 times FY22’s estimated earnings with a grossed-up dividend yield of 5.4%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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